Tax deregistration formalities further optimised

CHINA - Tax deregistration formalities further optimised

September 2019

At the end of 2018, the State Administration of Taxation (SAT) released a Circular on Optimising the Procedure for Dealing with Tax Deregistration of China-resident entities. In order to further optimise Tax Deregistration Formalities, the SAT recently issued the Circular on Deepening the Reform of "Streamlining Administration, Delegating Power and Strengthening Regulation, and Upgrading Services", with effect from  1 July 2019.

However, under this new policy, although China-resident entities may enjoy benefits in relation to speeding up the tax deregistration procedure, they may also face strict investigation by competent tax authorities, as we will explain in this article.

Key updates

In the newly released Circular, the tax authority may issue a tax settlement document immediately to a taxpayer who:

  • Has not handled any tax-related matters; or
  • Has not yet obtained invoices, does not have any unpaid taxes (including overdue fines) and has not been given any penalties; or
  • Has been declared bankrupt by a people's court and has applied to the tax authority for tax deregistration on the strength of the people's court's ruling on the termination of bankruptcy proceedings, under certain conditions.

In addition to the above, a taxpayer who handles tax affairs on a real-name basis (i.e. tax staff of the taxpayer handle tax affairs on a real-name basis) is exempt from providing several documents which were essential in the past.

Impact of the changes

In the past, it generally took three to six months (or even longer) to complete the whole tax deregistration procedure. The optimised process would significantly shorten the tax deregistration period.

However, only taxpayers categorised as “high-grade taxpayers” by a competent tax authority can benefit from this new released Circular. Therefore, tax compliance (e.g. submission of tax returns on time, correct calculation of taxes, etc.) is becoming more and more important.

Moreover, as tax deregistration is the last step in relation to tax collection, the tax authorities will raise their awareness and gain an in-depth understanding of its significance. It is essential to prevent potential lawbreakers from making use of institutional flaws such as issuing false value-added tax invoices, which could result in tax erosion. Therefore, the review of submitted documents by tax authorities during the tax deregistration procedure might become much stricter than before.

Our recommendation

As we can see from the above, legal entities must go through a tax clearance procedure, with submission of relevant documents, before successful tax deregistration. During a liquidation procedure, a competent tax authority might discover certain tax irregularities, so a complete and accurate tax clearance procedure is necessary and highly recommended.

Furthermore, although the legal entity/taxpayer is no longer subject to inspection and penalty by the tax authority after a successful deregistration, the relevant responsible person (e.g. a shareholder or legal representative) would still be the one whom the tax authorities could trace.

Hence, in order to minimise risks, management should carefully follow tax deregistration procedures, even though the official process is now further simplified. Meanwhile, we would be pleased to assist with all relevant changes or problems arising from this tax update in China. Please do not hesitate to contact us if you require any assistance.

Gordon Gao